The New Approach to Foreign Aid: Is the Enthusiasm Warranted?

Ian Vásquez is director of the Cato Institute's Project on Global Economic Liberty and editor of Global
Fortune: The Stumble and Rise of World Capitalism, published by the Cato Institute (2000).

Executive Summary

The failure of past foreign aid programs
has given rise to a new consensus on how to
make foreign aid effective. According to the
new approach, aid that goes into poor countries
that have good policies and institutions
is highly effective at promoting growth and
reducing poverty. Disbursing aid to countries
that have good policies contrasts with
the traditional practice of providing aid to
countries irrespective of the quality of their
policies or providing aid to promote policy
reforms. President George Bush's proposed
foreign aid initiative, the Millennium
Challenge Account, is based on the selective
approach to foreign assistance, as are, in
large part, the World Bank's calls to double
foreign aid flows worldwide.

Yet enthusiasm about the promise of selective
aid is unfounded. Bold empirical claims
about the positive effects of "selectivity" are
based entirely on World Bank research, most
of which is difficult or impossible to reproduce
by outside researchers. Though the
World Bank's research has had an enormous
influence on the debate, the few attempts to
reproduce the Bank's findings using its own
data and methodology have contravened the
Bank's findings.

Providing development assistance to countries
with decent policies and institutions is a
dubious undertaking. Good policies will reap
the rewards of growth. "Overrewarding" those
countries with foreign aid, by contrast, may
have effects similar to those of traditional foreign
aid programs: slowing the pace of reform
and development.

Even if selectivity could somehow be
made effective, the practical impediments to
making it work are formidable. Delivery of
MCA funds, for example, will surely suffer
from politicization, bureaucratic self-interest,
and congressional micromanagement.
The prevalence of traditional foreign aid programs
throughout the developing world will
also undermine the intended impact of more
narrowly focused selective aid programs.